2023 (1) TMI 120 - AT - Income Tax

Allowable business expenditure - Payment for breach of contractual obligation pursuant to an arbitration award in the pending litigation - HELD THAT - As could be seen from the record that the Ld. CIT(A) referred to the decision of the Hon'ble Apex Court in the case of Navsari Cotton 1981 (3) TMI 48 - GUJARAT HIGH COURT wherein evolved the tests on principles to claim deduction of an expenditure as business expenditure, and it includes, the expenditure incurred with a view to bring profits or monetary advantages today or tomorrow, to render the assessee immune from impending or reasonably apprehended litigation, in order to save losses in foreseeable future, for affecting economy in working which may pay dividends today or tomorrow, for increasing efficiency and working and for removing inefficiency in the working. When viewed from the angle of the tests formulated by the Hon'ble Gujarat High Court in Navsari Cotton (supra) it is clear that the amounts paid by the assessee to M/s. Atlantic Pharmaceuticals fall in the category of the expenditure incurred by the assessee to make it immune from the impending or reasonably apprehended litigation, and to save losses in foreseeable future in the shape of damage to the brand image in the market. With this view of the matter, we are of the considered opinion that the Ld. CIT(A) is right in his approach. As stated supra, by no stretch of imagination could it be said that the payment for breach of contractual obligation pursuant to an arbitration award in the pending litigation, cannot be said to have been incurred for any purpose which is an offence or which is prohibited by law. With this view of the matter, we uphold the findings of the Ld. CIT(A) and decline to interfere with the same. Appeal of the Revenue is dismissed.

Summary

Issues:
1. Allowability of payment of Rs. 3 crores as business expenditure under section 37(1) of the Income Tax Act, 1961.
2. Allowability of late payment of provident fund amount as a deduction.

Analysis:
1. The case involved a dispute regarding the allowability of a payment of Rs. 3 crores made by the assessee under section 37(1) of the Income Tax Act, 1961. The Assessing Officer treated the payment as a penalty or fine, disallowing it as a business expenditure. However, the CIT(A) held that the payment was made to fulfill a contractual obligation and was allowable as an expenditure. The tribunal examined the facts and found that the payment was made to avoid future litigation costs and maintain the brand image in the market. The tribunal agreed with the CIT(A) that the payment was not for any illegal purpose and upheld the decision, dismissing the Revenue's appeal.

2. The second issue pertained to the late deposit of provident fund amount by the assessee. The CIT(A) allowed this deduction, stating that since the amount was deposited before the due date for filing the return, it was allowable. The tribunal upheld this decision, noting that the late deposit did not violate any law and was in line with the provisions of the Act. Therefore, the tribunal dismissed the Revenue's appeal on this issue as well.

In conclusion, the tribunal upheld the CIT(A)'s decision on both issues, allowing the payment of Rs. 3 crores as a business expenditure and the late deposit of the provident fund amount as a deduction. The tribunal found that the payments were made in the normal course of business and were not in violation of any laws, hence dismissing the Revenue's appeal in its entirety.